Macro Analysis /

Pakistan Economy - Interest rates may be on hold as CPI tops out

  • Pakistan’s headline CPI clocks in at 23% in Sep’22 as fuel tariff adjustments are dispersed over coming months

  • Food inflation jumps significantly as floods increase supply-side concerns

  • The recent PKR appreciation relays positive notion that monetary tightening may be over

Intermarket Securities
3 October 2022

Pakistan has recorded headline inflation of 23.2% for Sep’22, down from 27.3% in the previous month. Sequentially, inflation is down 1.2%MoM. The decline comes from the government’s administrative efforts to disperse fuel tariff adjustments over the course of Oct’22-Mar’23. This may continue to have an impact on coming inflation readings, and help to offset the flood-induced price hike in staples. Core inflation is an issue, however, having continued to trend up in September (up 0.9%/1.4%MoM to 14.4%/17.6% for Rural/Urban). That said, given the recent PKR appreciation, coinciding with the change in finance minister, it is possible that the SBP keeps interest rates on hold again in its next MPS due on Oct 10th.

  • Food inflation jumped 5.8% MoM as key staple prices continue to remain impacted by floods. These include wheat, milk, vegetables, eggs, chicken and pulses.

  • The key theme for the respite in Sep’22 headline inflation has emerged from electricity tariffs, where the fuel tariff adjustment of PKR9.9/kWh has been spread over the next six months. If this had not happened then CPI could have clocked in north of 27% for September.

  • Marginal rise in retail fuel prices continued to lend support to rise in transport services costs. The recent decline in petrol and diesel prices (petroleum levy reduced by PKR5/ltr for petrol) should soften coming inflation readings.

PKR appreciation and administrative measures impact FY23 estimate

With the recent PKR appreciation and administrative measures in mitigating the impact of fuel tariff adjustments and retail fuel prices, our inflation forecast for FY23f drops to 22.0% from c.24.0% previously. The sustainability of the external account is key for sustaining interest rates going forward. Challenges remain, where the international bond maturity in Dec’22 can eat nearly 12% of existing SBP reserves.